Bernanke refuses to rule out stimulus

Federal Reserve Chairman Ben Bernanke on Thursday said the central bank is “prepared to take action” to protect the economy from the European debt crisis and other threats.

Bernanke did not provide any indication of whether the Fed is considering further stimulus for the economy. He held firm, however, when GOP lawmakers pressured him to rule out a third round of quantitative easing in the wake of the turmoil in Europe and May’s disappointing jobs report.

Rep. Kevin Brady (R-Texas), vice chairman of the Joint Economic Committee, said he wished Bernanke would rule out “QE3,” arguing that the uncertainty over the Fed’s future course is holding the economy back.

“No actions from the Fed will get this recovery moving in a way I think we all would be satisfied,” he said.

But Bernanke held his ground.

“At this point, I can’t say anything is completely off the table,” he said.

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The Fed has completed two rounds of quantitative easing already, in which it buys hundreds of billions in bonds to spur lending and economic activity. Republicans have grown increasingly concerned about the initiatives, warning that the huge purchases might lead to damaging inflation down the line.

A central question for the central bank is whether the economy can grow at a fast enough rate to bring down unemployment. If the recovery does not gain momentum, the Fed could step up to the plate.

“Will there be enough growth going forward to make material progress on the unemployment rate?” he said. “That’s, I think, a key question.”

He said Europe’s debt crisis poses “significant risks” to the U.S. financial system and economy, but that the Fed’s options to address the situation are limited.

“There’s not a whole lot that can be done that I can think of to attenuate the problems in Europe,” he said. “The main thing that Congress can do is help strengthen our own economy.”

Investors have speculated that the recent slowdown might spur the Fed to pursue further stimulus, perhaps as soon as at its next policy-setting meeting, which wraps up June 20.

The central bank has already kept interest rates near zero in a move to help the economy, and Fed officials have said they expect to keep them there until the end of 2014. 

Bernanke’s remarks before the panel marked his first public statement since the Labor Department’s dismal jobs report on Friday, which found the economy adding just 69,000 jobs in May as the unemployment rate climbed to 8.2 percent. 

Bernanke said the recent slowdown in hiring might be “exaggerated” by the unusually warm winter, which helped spur an increase in hiring at the beginning of the year.

But he cautioned the figures could also be an indication that employers have largely filled the spots they left open during the recession, which means the economy needs to pick up the pace if the unemployment rate is to decline further. 

The Fed chairman also renewed his call for Congress to address the debt, warning the nation is on a “clearly unsustainable” fiscal path that could lead to a full-blown crisis. 

Bernanke said policymakers face “daunting” fiscal challenges, but that the matter is “one of the most important things Congress could be working on.” 

At one point, the typically even-keeled Bernanke suggested the Fed is getting tired of trying to steer the economy with little help from a gridlocked Congress.

“Monetary policy is not a panacea,” he said. “I’d be much more comfortable if, in fact, Congress would take some of this burden from us and address some of these issues.”

While calling on Congress to adjust its fiscal policy, he warned that any changes must not imperil the recovery, singling out the approaching “fiscal cliff” as a “significant threat” that cannot be ignored. 

“What is particularly striking here is that this is all pre-programmed. If you all go on vacation, this is still going to happen,” he told lawmakers.

The “fiscal cliff” is Bernanke’s term for the massive number of tax increases and spending cuts that are set to take effect automatically in 2013.

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The Fed chairman added that, while the rapid swings in fiscal policy are not set to take effect until the end of the year, the uncertainty about how Congress will resolve those issues could weigh down the economy now, sapping confidence from consumers and businesses looking to invest.

The good news, Bernanke said, is that avoiding the cliff and getting the nation on a healthy fiscal track are “fully compatible and mutually reinforcing objectives.”

Adopting fiscal reforms, and averting the economic contraction that would come with existing policies, would help lower unemployment, protect lower borrowing rates and improve confidence in the economy. Getting the nation on track fiscally would also make Congress’s job easier, he noted. 

“Although we cannot expect our economy to grow its way out of federal budget imbalances without significant adjustment in fiscal policies, a more productive economy will ease the tradeoffs faced by fiscal policymakers,” he said.


— This story was first posted at 10:00 a.m. and has been updated.